No. 1 Small-Cap Fund Buys Robots, Mattresses, Ink Pens

BOSTON ( TheStreet) -- The $69 million Hodges Small-Cap Fund ( HDPSX), based far from the financial world in Dallas, has an extraordinarily eclectic portfolio. And not for nothing. Three stock holdings have more than doubled in the past 12 months, including one that has almost quadrupled.

Craig Hodges, lead manager of the four-person investing team, said in an interview he bases his picks on the main fundamentals of individual companies, rather than taking a top-down approach based on industry performance. The in-house research team and portfolio managers study hundreds of companies, perform in-depth analysis and scrutinize each company's long-term investment potential.

In particular, they try to find shares that may be overlooked or misunderstood by more conventional approaches.

"We're totally company-focused," Craig Hodges says. "We try not to pay too much attention to the outside noise and try to identify companies in their (early) growth phase.

"We can find companies in this environment that are not affected" by the macro-economic conditions and volatility that characterizes the markets this year, he said. "We're finding companies that are successful in their businesses despite what's going on around them."

The fund, launched a week before Christmas in 2007, is a top performer in its small-blend category of funds with a return of 3.7% this year, which puts it in the top 1% of its peers, as tracked by Morningstar. It's up 26% over the past 12 months, ranking in the top 2%. The Russell 2000 Index, a small-cap barometer, has fallen 8% this year and risen 12% over the past 12 months.

Hodges Capital manages a family of five mutual funds, including the Hodges Small-Cap Fund.

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Mako Surgical ( MAKO) has produced a robotic device and implants for minimally invasive knee and hip orthopedic surgical procedures with its "MAKOplasty" system.

The field of robotically assisted surgery was developed to overcome both the limitations of minimally invasive surgery and to enhance the capabilities of surgeons performing open surgery.

"Mako is where Intuitive Surgical was a few years ago," Hodges said. Intuitive Surgical ( ISRG) is an early developer of robotic surgeries with its "da Vinci System," which is used in minimally invasive surgeries.

Intuitive Surgical's shares are trading at about $388 per share and the company has a market value of $15 billion.

Mako posted a loss of $20.9 million over the first six months of this year, but revenue rose 83% to $31.6 million. It turned an operating profit in the most recent quarter.

"The stock's been a fantastic performer, but it will be volatile," Hodges said.

The company has installed 67 devices in medical clinics and enabled over 5,000 MAKOplasty procedures, according to Morningstar.

Its shares are up 34% over the past three months, 138% this year and 247% over 12 months. It has a market value of $1.6 billion. Mako shares hit a 52-week of $39.40 on Monday.

PriceMart ( PSMT), based in California, owns and manages international merchandising businesses that license and own warehouse-type retail-membership stores that sell basic consumer goods, including perishable foods. That's a concept that has worked well for several other U.S.-based companies.

PriceMart's growth wrinkle is that it is taking the membership warehouse store premise international. "They've taken their concept to Latin America which is an absolutely booming area," said Hodges.

The company now operates more than 20 stores in Central America, the Caribbean and Micronesia.

"It's a position that we've been adding to and it is one of my favorites right now," he said of the stock. "We've been following them for about five years.

"Same-store sales are up 15% to 20% (year-over-year) and they've been doing those numbers for many quarters unbeknownst to (Wall Street), and now they're starting to get some attention," said Hodges.

PriceMart's shares are up 67% over the past three months, 94% this year and 159% over the past 12 months, and it has a five-year average annual return of 42%. The company has a market value of $2.2 billion.

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Tempur-Pedic International ( TPX) makes premium "viscoelastic foam" mattresses and pillows, with the retail channel making up the bulk of its sales.

"It's shocking how well they are doing in this economic environment," Hodges said, because the mattresses sell for $3,000 to $5,000. "They're using social media to convince people (that the price is worth it) and it's worked out extremely well.

"It's a product that lasts and has very high customer-satisfaction levels. And now they're getting bigger internationally, which is a new growth factor.

"Our take is that when housing comes back, they will do extremely well," said Hodges.

Shares are up 58% this year and 135% over the past 12 months, giving the company a market value of $4.2 billion.

A.T. Cross ( ATX) is best known as a 100-year-old maker of high-end ink pens, but the company has been restructured with that part of the business now being done in China.

"It's a company we've followed forever" and now it has a new product line: "sunglasses," said Hodges. "This is a tiny value company with a new growth element."

It bought the Costa Del Mar brand of sunglasses in April 2003. The company makes polarized sunglasses for use in sports such as fishing, sailing and surfing.

The Costa Del Mar brand is popular on college campuses, particularly in the South, and that popularity is spreading, Hodges said. A pair costs anywhere from $90 to $300.

"And they're taking market share" from the likes of the popular Oakley brand, said Hodges.

It also has a smaller line of sunglasses called Native, which has just been introduced and doesn't have much traction yet.

A.T. Cross shares are up 5.5% this year, 89% over the past 12 months, and they have an average annual return of 10% over the past five years. The company has a market value of a mere $125 million.

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Kirby ( KEX) provides marine-transportation and diesel-engine services to the marine and power-generation markets in the U.S. It operates the largest fleet of tank barges in the U.S. inland waterways.

The company is benefitting from the domestic oil shale boom as it moves crude oil and petrochemicals on its barges down the Mississippi River to refineries and for distribution. It also ships various types of agricultural commodities.

"It's a very well-run company that has made some recent acquisitions with a number of synergies to them," Hodges said, and barge-fleet usage is at a very high 90%.

"We think they could be an $80 stock in couple of years," Hodge said. "And it should have $5 per share annual earnings power over time," as acquisition synergies kick in.

Kirby's shares are up 30% this year, 50% over the past 12 months and have a five-year average annual return of 13%. It has a market value of $3.2 billion.

Atwood Oceanics ( ATW) is a small contract deep-water oil driller with a fleet of nine rigs, made up of both jack-up and semisubmersible rigs. Much of its work is done internationally.

"We feel there is going to be a big, deep-water drilling-rig shortage by 2013 and when that happens, the day rate (of rig leases) will go way up," said Hodges. "It's hard (for new companies) to get into this business so they will have tremendous pricing power."

He said his firm considers its shares cheap as they are trading at a price of less than 10 times projected earnings.

The stock is up 0.6% this year and 49% over the past 12 months, giving it a $2.6 billion market value. Its average annual return over the past 10 years is an amazing 18%.

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SandRidge Energy ( SD) is an independent oil and natural gas company with operations in the Permian Basin and Mid-Continent region of the central U.S.

The company has been increasing its capital expenditures significantly and is increasing its borrowings, Hodges said. Investors haven't liked that, causing its stock to plummet 27% over the past three months.

SandRidge is aggressive. It acquired significant oil shale acreage a few years ago for $100 million and just sold 10% of it for $500 million to South Korean investors, which will help fund new drilling programs, said Hodges.

"I think analysts have been getting this wrong (with their mostly negative ratings) and don't understand what they're doing," Hodges said. "They were natural-gas drillers a few years ago and now its 80% oil, which is much more lucrative. And this is a company with one of best executives in the business running it" in Tom Ward.

SandRidge's share performance has been volatile. The stock has risen 2.9% this year and 53% over the past 12 months. The company has a market value of $3 billion.